The last two months has seen NZUs break through the $7 level for the first time since May 2012.

Yesterday NZUs close at around $6.90 after reaching earlier $7 earlier in the day. This is an increase of 35% in price for the same time last year. Most of this lift can be attributed to a lack of liquidity at low prices coupled with the prohibition of international credits in the NZ ETS which came into effect in June.

The first major rally happened in December where prices lifted 20% to close the year at close to $6 in anticipation of the NZ ETS becoming a domestic market in June 2015. Prices slowly moved upwards to peak in mid April at $6.85 when against all expectations it rapidly fell finishing May $5.25. Most of the drop can be attributed to an increase in supply coming to market from free allocation NZUs, and a lack of buying interest in NZUs from emitters who were focused on meeting their 31 May surrender obligations with overseas units.

On the 01 June the ETS officially became a domestic market with NZUs (and NZ AAUs) the sole currency of trade. NZUs quickly regained the lost ground jumping from $5.50 to hit a 3 year high of $7.10 over one week. Since then the market has entered once again a period characterised largely by a lack of liquidity with buyers unwilling to keep pushing prices up, and sellers similarly uninterested in dropping prices.

Next month the Ministry for the Environment (MFE) are due to release the annual ETS report which is expected to show once again an increase in issued NZUs adding to the already large surplus in the Registry. Whether this report will have any impact on the market is unclear given that most participants are already well aware of the surplus. And as has been discussed many times before a surplus of NZUs in the Registry does not necessarily equate to oversupply of the market given that many of the NZUs are held by forest owners who either need the units to meet their own harvest obligations or are unwilling to sell down at low prices.

An interesting development is MFE's announcement in May on timelines for possible Government auctioning of NZUs to increase supply. MFE has signalled that auctioning is a medium to long term option and will take at least 18 months to design. They have also indicated that auctioning may not necessarily occur immediately once set up. This should allay some fears of further supply to market in the short term. On the flipside there is also the possibility of increased demand arising from changes coming out of the ETS review set down for later this year where some anticipate the Government may wish to start phasing out the 1 for 2 emissions subsidy for emitters.

Lastly, it will be interesting to see what, if any impact the Government's post-2020 emissions target will have on the market. Most will be unsurprised by the unambitious target announced yesterday which is only a reduction of 11% below 1990 emissions by 2030. What is of concern is that the Government has made it clear it wishes to have once again unrestricted access to international units. However, even if the Government is successful in getting access to overseas units to offset the national accounts this does not necessarily translate to automatic use of overseas credits in the ETS.